Market Setup 1st February

Markets, News and Budget!

February is here and its a month which economics wise is the most important month. We are going to start today with Budget. Everything takes a back seat when budget is in the forefront. This is one of the biggest fundamental of the year and none of the other factors should be taken seriously when it comes to budget. Finance minister will be presenting this year’s budget which technically will be the last budget for the Govt before 2019 elections. It is because next year Feb Govt will not present full budget but will present vote on account budget only as elections are scheduled in May. But now there is a rumor doing rounds that 2019 elections will be preponed by 5 months to December 2018 and if that happens then by Feb 1st we will have a Govt in place and we will have another full budget. But this year’s budget will turn out to be different.

How different will that budget be?

If Govt has any plans of advancing the Lok Sabha polls to Nov-Dec then expect a very populist budget. The focus will be agriculture sector and a lot of sops and even farm waivers can be announced. There will be packages to give a feel good factor to trader community who are very upset with the GST. Now, the question is why does Govt wants to advance the elections?

It is because of the following factors:

1. Gujarat election was very tough and fighting 3 tough elections in Rajasthan, MP and Chattisgarh, all BJP ruled states will be tougher. Any loss in any state means opposition unity and Rahul Gandhi gaining credibility just 6 months before Loksabha elections, which Govt might not want.

2. There is a warning about agro production given by the govt in its annual economic survey. What the survey did not talk about is the fear of El nino in 2018 which might affect the monsoon. If 2018 also turns out be a drought year like 2014 and 2015 then agricuture will suffer and farm distress will further increase. The impact on rabi crop will be much more than khariff crop and Govt wants to avoid that tough situation and go to polls with lot of sops to the farmers before khariff crop comes up for sale in December.

All this is a mere speculation and there is just a 20% possibility of that happening. Govt will weigh all the pros and cons before taking any concrete steps. We should not forget the fact that in 2004 Vajpayee Govt advanced the elections to April-May 2004 from Oct-Nov 2004 when they were originally scheduled to cash in on the feel good factor and India shining and they lost the elections very badly. Modi Govt will keep that in mind before taking any such decision. So observe this budget carefully to see it Govt gives any hints.

What to expect from this budget?

For many days there are so many speculations about the budget and finally everything is coming to its climax. Bond yields are going up due to global factors but also contributing are the local factors where there is a big worry of fiscal deficit being missed by 0.3-0.4% of GDP. If the figure is even a fraction above 0.3% then the bond markets will react violently. The equities market has a different worry. They are more concerned about the introduction of LTCG or Long Term Capital Gains Tax. There are two thoughts among the investors.

One section believes that it wont be introduced now and the other group which believes that the time period could be 2 years or more. Both of them will be positive for the market. But if LTCG is imposed immediately or retrospectively then there will be a big crash. Apart from the LTCG the rate of LTCG is also important. Anything upto 5% will be a welcome sign and markets will not react. But a 10% or 15% would be catastrophic and there will be a big reaction to it.

What is the NIFTY strategy for the day?

If you have followed my advise and if you have taken a long position in Nifty at 10980 then you can expect 11200 to be reached today and you can make a 220 point profit and you should exit as soon as 11200 is reached. This is not a time to speculate as there are many factors weighing in this budget. There is plenty of green in Asia and that would mean we will open flat to positive around 11050 level. After that it is the budget that will move the market and wait for the cues. If the target of 11200 is not reached and if there is a crash then keep a deep stop loss of 10850 and wait. There will be a rally post budget also.

What is the bank nifty strategy for the day?

I have also given a call to enter a long position in bank nifty around 27200 and if you had taken that position you will be sitting on a profit of almost 200 points and now the target of 27500 is just 100 points away. We might hit that that target before the budget itself. If that happens, exit take profits and wait. Bank Nifty is even more volatile than Nifty and taking fresh positions is possible only after digesting budget. But in case you dont reach 27500 then keep a stop loss of 27000 as stop loss and wait for post budget rally like in Nifty.